As supply in the education and training industry is cleared, policy red lines continue to be clarified, and the fundamentals of leading companies continue to be repaired.
New Oriental actively lays out new businesses, cooperates with the company to build new production capacity, and effectively controls costs. We are optimistic about the sustainability of the company's performance recovery.
The impact of the company's K9 business adjustments was gradually cleared, and the net operating cash flow/non-international standard adjusted net interest rate was corrected in FY22Q4/FY23Q1, respectively. We divided the development of New Oriental Group into three stages: 1) 1993-2006, focusing on language training, completing the original accumulation of experience and brand; 2) in 2007-2021, K12 development later took the lead, consolidating its leading position in education and training; 3) from 2022 to now, nurture energy and explore new businesses in a variety of ways. Judging from historical development, the company has deep brand accumulation, rich management experience, and strong business development capabilities. As of FY24Q1, the study abroad business examination/consulting revenue was +52%/+27% year-on-year. Benefiting from improved efficiency and fee control, gross margin has basically returned to the level before the double reduction, and the development trend is good.
At the industry level, the number of points is clear after the double reduction, promoting an increase in industry concentration. Since the “double reduction” in 2021, the supply side was quickly cleared, and the competitive landscape was optimized. The red line of subject policies is becoming more and more clear, regulations on non-subject content are gradually becoming clear, and demand for education continues to be strong. Before the 2019 epidemic, China's K12 education and training market exceeded 800 billion yuan. We split the K12 market size according to the number of people enrolled in K12 students* training penetration rate* customer unit price, and determined that the K12 market size is expected to return to more than 421.3 billion yuan in the medium term, corresponding to a double reduction of more than 52% of the previous market size.
The current state of commercialization in the New Oriental: Education and training brands have significant advantages, and have recovered rapidly after transformation. 1) Overseas exam preparation and consulting services: FY24Q1 study abroad business examination/consulting revenue was +52%/+27% year-on-year, recovering strongly. Relying on New Oriental brand advantages, demand for overseas exam preparation and consulting services is expected to maintain steady growth. 2) Domestic exam preparation business for adults and college students: FY23Q4/24Q1 The college student training business increased 34%/26% year-on-year, and maintained healthy growth as a whole. According to wind data, the postgraduate pass rate showed a fluctuating downward trend. We believe that future industry demand will still be strong, and business profit margins are expected to gradually rise. 3) Oriental Selection and Online Education Business: FY23 subsidiary Dongfang Selection achieved net profit of 1.09 billion yuan, an increase of 890.9% over the previous year. As an extension of the content ecosystem, it has become the company's second growth curve. 4) Quality education and cultural tourism business: In 2023, the company began to lay out the cultural tourism business. Relying on the advantage of live streaming traffic, overall sales expenses are relatively manageable, the overall consumption capacity of demand-side users is strong. The new FY24Q1 business is developing rapidly, and revenue is growing 103.3% year-on-year, and is expected to continue to grow.
First coverage, giving a “Highly Recommended” investment rating. We expect the company's adjusted net profit for FY24-26 to be $56/7.3/960 million US dollars, respectively, and the corresponding PE is 27/21/16x, respectively. Considering that the company's traditional business is recovering well and the new business is progressing rapidly, we gave 25 times PE for FY25, with a corresponding market value of 18.25 billion US dollars.
Risk warning: New business development falls short of expectations, regulatory risks, public opinion risks, corporate governance risks.